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Apple €13 Billion Tax Bill Really A Fight Over Who Gets the Money: EU or US?

Apple is facing a major corporate crisis as public opinion is focused on corporate greed

Ireland operating like a “rogue state”

Today’s long-expected announcement that the European Union has assessed that Apple owes €13 Billion ($14.5 Billion) in back taxes to Ireland and the EU, is only one part of a much larger story of multinational corporations global tax jurisdiction and tax avoidance, and a looming fight between the EU and US over which one gets the €13 Billion. There is not much disagreement whether Apple actually owes the money. It also reopens the as yet unresolved matter of multinational corporate taxation, most recently exposed by Pfizer’s announcement that it would move its HQ to Ireland to avoid U.S. taxation, which was later blocked by the U.S. government.

The problem with this is that Ireland has become a focal point for global corporate tax evasion by numerous foreign corporations. Ireland has suffered through a cycle of boom and bust, culminating in the 2008 global financial meltdown, which left Ireland’s economy in shambles. The upshot is that since that time, Ireland has become the poster child for tax evasion schemes, which has led to numerous EU investigations of Ireland’s tax laws. Ironically, it also led KPMG Canada to establish its own similar scheme in The Isle of Man, now under investigation by the CRA.

The bottom line is that this could not be happening at a worse time for Apple. The company is very likely facing a major corporate black-eye, at a time when public opinion is focused on corporate greed, income inequality and the decline of the middle class.

The opening salvo in a much larger global issue

“U.S. companies are the grand-masters of tax avoidance. I see it (U.S. objections to the EU ruling) as the United States digging in its heels, that it is protecting its corporate champions when in fact it’s claim jumping on what is really European income,” said Edward D. Kleinbard, professor at the Gould School of Law at the University of Southern California and a former chief of staff to the congressional Joint Committee on Taxation.

Margrethe Vestager, European Union Commissioner on Competition

The EU charges against Apple:

Apple’s effective European tax rate was 1% on sales of 16 billion euros or more per year.

It sank as low as 0.005% in 2014.

Apple created a head office that did not exist: “This ‘head office’ had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter … The ‘head office’ did not have any employees or own premises.”

The pact deprived other European countries of billions of euros in unpaid taxes.

Reblogged from The New York Times:

Apple Must Pay Billions for Tax Breaks in Ireland, E.U. Orders

Europe’s antitrust enforcer ordered Ireland to collect billions in back taxes from Apple, a move that will ramp up trans-Atlantic tensions over what global companies pay in the countries where they do business.

The decision, part of a broader crackdown on tax avoidance by the European Union commissioner for competition, slammed Ireland for providing illegal incentives that allowed Apple to cut its tax bill in the region to virtually nothing some years. The clawback of taxes — 13 billion euros, or about $14.5 billion, plus interest — is a record penalty by the union for such activities.

The ruling adds to a strained relationship between the United States and the European Union over who has the right to regulate tax payments by some of the world’s largest companies.

But American officials have warned that the commission is overstepping its power given that taxes are typically left to national governments to oversee and that European officials should not retroactively issue penalties in past tax rulings. They also emphasized that such cases undermine continuing efforts to overhaul global policies and create measures to curtail tax avoidance.

“U.S. companies are the grandmasters of tax avoidance,” said Edward D. Kleinbard, professor at the Gould School of Law at the University of Southern California and a former chief of staff to the congressional Joint Committee on Taxation.

“Nevertheless, because of the nature of U.S. politics,” he said, the Apple case “will be framed by the U.S. as Europe overreaching and discriminating against ‘our team.’ ”

Since early this year, Ms. Vestager and Jacob J. Lew, the United States Treasury secretary, and their teams have met regularly to discuss Europe’s state-aid tax investigations. Mr. Lew visited Brussels in July to put forward the American perspective.

Just last week, the Treasury Department released a report criticizing any efforts to claw back taxes from American companies. The document repeatedly claimed that the European Commission did not have the right to undertake the clawbacks and that they could harm America’s efforts to collect taxes from domestic companies with vast international operations.

“That outcome is deeply troubling as it would effectively constitute a transfer of revenue to the E.U. from the U.S. government and its taxpayers,” Robert B. Stack, a senior Treasury official, said in the report.

The European Commission denies these claims, saying that it is relying on a history of using state-aid rules related to corporate tax issues. The Brussels-based agency also says that it has the right to act when certain companies are provided with an unfair advantage — either through tax breaks or other incentives — and that Apple’s operations are based in Ireland, therefore falling under its jurisdiction.

“No rules have been changed — not one rule,” Ms. Vestager said at a news conference in Brussels on Tuesday. “This is a question of paying unpaid taxes.”

In the Apple case, the antitrust commission said that the deals with Ireland allowed the company to allocate profits from two Irish subsidiaries to a “head office,” but that it could not have generated such profits since it had few operations and little distribution or substantive business.

By doing so, the commission said that Apple could effectively lower its tax rate on European profit to just 0.005 percent in 2014. Ms. Vestager said at a news conference on Tuesday that amounted to roughly €50 for every €1 million in Apple’s European profit.

“The so-called head office had no employees, no premises, no real activities,” Ms. Vestager said.

Apple defends its tax practices, saying it follows the law and pays all of its taxes.

“The commission’s case is not about how much Apple pays in taxes, it’s about which government collects the money,” the company said in a statement. “It will have a profound and harmful effect on investment and job creation in Europe.”

Ireland has broadly faced scrutiny for its tax strategies to attract large multinationals.

Its corporate tax rate, at 12.5 percent, is one of the lowest in the developed world. Other incentives and breaks allow companies to cut their bill even further. While it is phasing out some of the more contentious loopholes, Ireland just introduced a new break for revenues on intellectual property, a potentially huge benefit to large technology companies with troves of patents.

How Europe Is Going After Apple, Google and Other U.S. Tech Giants

The biggest American tech companies face intensifying scrutiny by European regulators, with — pressure that could potentially curb their sizable profits in the region and affect how they operate around the world.

The United States has a complicated view on Apple’s dealings in Ireland. The European inquiry was spurred in 2013 when a United States Senate committee said that Apple had negotiated a special corporate tax rate of 2 percent or less in Ireland.

The Treasury has also taken steps to curtail so-called inversions, in which an American company buys an overseas counterpart and shifts its headquarters overseas to lower its taxes. Ireland, with its low corporate tax rate, has been an especially big beneficiary of such deals, which helpedplump up the country’s economy last year.

Ireland stands by its approach to taxes, saying it did not give preferential treatment to Apple or other companies. The country’s Finance Ministry, in a statement, said that the commission’s decision would undermine continuing global tax overhaul and create uncertainty for business in Europe.

The finance minister, Michael Noonan, said he would move to appeal the Apple decision, adding it was “necessary to defend the integrity of our tax system.”

“It is important that we send a strong message that Ireland remains an attractive and stable location of choice for substantive investment,” he said.

Apple also said it would look to overturn the decision, although any appeals process could take years.

“The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process,” the company said in a statement.

The commission said the amount due in Ireland could be lowered if the American authorities decided that Apple should have paid more tax in the United States.

The commission also said that other countries in the European Union could take a share of the money if Apple conducted more taxable business in those nations than the company had previously declared. That could reduce the amount Ireland collects and give additional revenue to other countries.

Apple is also expected to have to pay interest on the €13 billion, but the commission did not disclose how much that would be.

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David Mayes

Founding Partner, Vendange Partners, UBC adjunct faculty, Intel alumni, technology assessment, international business, clean tech, fly fisherman, native Californian and citizen of France, who has been very fortunate to have traveled, lived and worked all over the globe. My wonderful wife, Isabelle has reintroduced me to my French Provencal heritage.